‘An abuse which needs to be stopped’: Judge slams developers’ powers

Property developers are running roughshod over owners corporations to benefit their own interests and for their own financial gain, a government law review has been told.

In some cases, developers have signed expensive contracts to extend decades and have strong armed themselves onto committees for life, one submission claims.

Supreme Court Justice Greg Garde ??? also president of the Victorian Civil and Administrative Tribunal ??? went as far as calling the appointment of related body corporate managers under long-term contracts at excessive fees “an abuse which needs to be stopped”.

It is understood many residents feel they are getting a raw deal, with developers handing contracts to mates rather than signing those that best serve their interests.

Justice Garde’s submission was one of dozens addressing the obligations of developers in the Consumer Property Law Review of the Owners Corporation Act.

Those who wrote to the inquiry were concerned developers exerted a disproportionate power in early stages of owners corporations, given off-the-plan developments could often comprise solely the developer, or just a few other owners, when first established.

Deakin University researcher Nicole Johnston, who wrote a PhD on the topic, said off-the-plan buyers needed to be warned of the dangers.

“Developers have an inordinate amount of control of the owners corporation in its early life,” Dr Johnston said. “Buyers are often unaware of this and have little say in the decisions that the developer makes on behalf of the owners corporation. They are buying blind.”

Among the challenges Dr Johnston’s research identified were developers’ inappropriate use of service agreements and proxy votes, problems rectifying building defects and underestimated budgets and levies. The latter included “low-balling” buyers on fees to secure a sale.

“This is a common practice across Australia whereby developers keep the initial budget low in order to market a scheme as a ‘low fee’ development,” Dr Johnston’s submission read. “The shortfall catches up with the owners corporation and owners are forced to pay higher than expected fees, sometimes for years.”

Presently, the act requires developers to act honestly and in good faith in the interests of the owners corporation for five years from the date of the registration. The majority of relevant submissions, including Justice Garde’s, suggested that period be should extended.

Many also suggested developers should not be appointed as managers for the first 10 years and should not be able to vote on matters relating to building defects, as in NSW.

“Developers who have been around for a while know how to play the system, and use the legal system,” read one submission by the Southbank Residents Association.

“Developers can use mechanisms to entrench their power and control … One of our member OCs’ has spent $650,000 on legal bills fighting a 55 year contract worth $20 million ??? [Another member] OC had the developer appoint himself as the OC chairperson of the OC committee for life.”

Zac Gillam, senior policy officer of Consumer Action Law Centre, said owners corporations should be there to serve residents.

“And obviously there is a danger if they are dominated by developers that decisions will be made and fees will be imposed upon people who are going to struggle to pay them,” he said.

The Consumer Action Law Centre is advocating for hardship programs for vulnerable owners, allowing payment plans for fees. Mr Gillam said though he was not aware of any specific cases, “hardballing” buyers with low fees would be deceptive and misleading conduct.

NSW legislation also only allows developers with more than two-thirds of voting power to appoint a non-related manager until the first annual general meeting, which several submissions expressed support for.

But a submission by the Property Council said the existence of competing interests between owners and developers did not justify these further restrictions.

“If a developer retains ownership of units in a owners corporation following the owners corporation’s first AGM, that developer should hold voting rights proportionate to its unit share,” the submission reads.

“The developer has a wealth of knowledge about the construction and structure of the building that is invaluable to the proper management of a owners corporation. We believe that the value of this knowledge should not be overlooked.”

Public consultation for the issues paper closed last month and will now be reviewed by Consumer Affairs Victoria.